If you are convinced about the high-risk high-return theory, this bet may make you smile.
Sundaram Small and Medium Indian Leading Equities Fund (SMILE), whose IPO opened on January 3, 2005, hopes for superlative gains through high allocation to relatively risky but rewarding mid- and small-cap stocks.
As per a press release, the fund would invest between 65 to 100 per cent of its assets into small- and mid-cap companies and up to 35 per cent into other equities, including ADR and GDRs. It can have high allocation to cash--up to 15 per cent. The fund also plans to participate in IPOs.
The fund promises to achieve capital appreciation by investing mainly in small- mid-cap stocks. It defines mid- and small-caps as stocks whose market capitalisation is equal or lower than the market cap of the largest stock in the CNX Midcap 200 Index. As the two are highly volatile, the fund plans to minimise risk by not investing more than 5 per cent of its assets into any single stock. The fund would also follow an aggressive dividend declaration policy to book profits regularly and protect gains.
There won't be any entry load during the IPO period. However, an exit load of 2.25 per cent would be levied on redemptions worth more than Rs 5 crore within six months. Even after the end of the IPO period on January 24, the fund would not charge any entry load for investments of up to Rs 1 lakh and more than Rs 2 crore. It seems to be a good strategy to lure retail investors. An entry load of 2.25 per cent would be applicable on investments between Rs 1 lakh and Rs 2 crore.
Our Take
The fund looks highly aggressive by design and might have above-average volatility. While this sort of funds should never form the core of any portfolio, a lower exposure might be considered, as over the long-term, small- and mid-cap stocks have ability to generate good returns. Only long-term investors who can withstand a high degree of volatility and risk should consider this kind of bet.
As far as participating in the fund IPOs is concerned, we have often said that it's not a great idea, as new funds don't have any performance record. A wait-and-watch policy, specially for a highly aggressive funds like this, is desired.
And if you are too convinced about the bright prospects of this fund, do pack your bags for the long-term. With markets at their all-time highs, only time would tell if the fund brings you smile or tears.
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